Is It Time to Buy McDonald's Corporation (MCD)?

McDonald's Corporation (MCD) recently pulled back to a key trendline

Jul 7, 2016 at 12:02 PM
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McDonald's Corporation (NYSE:MCD) has been a strong performer over the past year, adding 26% on the charts, and hitting a new all-time high of $131.96 in May. Much of its recent success may be attributed to the decision to offer items from its breakfast menu all day, and it appears the company is hoping that taking this strategy a step further will help push the stock higher once again. Specifically, McDonald's announced Wednesday that it will expand its all-day breakfast offerings to include biscuit, McMuffin, and McGriddle sandwiches across restaurants nationwide. And after a slight breather over the past two months, it looks like it may be time to jump back on the stock's bullish bandwagon.

Specifically, the shares of MCD have shed 8.5% since tapping their record high, and just over a week ago pulled back to their 200-day moving average -- a relatively upbeat signal for the stock in recent years. According to data compiled by Schaeffer's Senior Quantitative Analyst Rocky White, MCD has pulled back to this trendline a total of seven times in the past three years. And 21 days after such a signal, the shares have averaged a return of 1.1% -- and have given a positive return 67% of the time. Today the stock is up 0.1% at $120.78.

Looking specifically at the set up for MCD today, there is plenty of room for an unwinding of bearish sentiment to propel the shares back to their highs or beyond. Among 24 brokerage firms providing coverage, for example, 15 rate the stock a "hold" or worse. Plus, short interest on the equity has spiked by 77% over the two most recent reporting periods.

Options traders have been placing pessimistic bets at a faster-than-usual rate lately. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open nearly three MCD puts for each call in the past two weeks. The resulting 10-day put/call volume ratio of 2.85 sits higher than 97% of all readings in the past year.

Likewise, near-term options traders have been unusually bearish. MCD has a Schaeffer's put/call open interest ratio (SOIR) of 2.23 -- in the 98th percentile of its 12-month range. And focusing on near-the-money options in the July series, MCD's front-month gamma-weighted SOIR of 2.65 shows an even heavier put skew.

And for short-term options buyers, this is an especially attractive time to pick up premium on MCD, as the stock's Schaeffer's Volatility Index (SVI) of 13% sits in just the 4th percentile of its annual range. That means those near-term options should be very well priced, from a volatility perspective.

Further adding to the bullish case for MCD in the near term, peak put open interest in the front-month series resides at the underfoot 120 strike. An unwinding of hedges related to these positions could help the $120 level serve as support for the shares as the option's expiration approaches. Plus, upbeat attention from the brokerage bunch or an exodus of bears from the options pits could add fuel to McDonald's Corporation's (NYSE:MCD) fire.

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